Even profit-funded pyramiding did not make the cut
Using "house money" to scale into winning trades might seem like a smart way to manage risk, but my latest tests show it remains a dangerous strategy…
Using “house money” to scale into winning trades might seem like a smart way to manage risk, but my latest tests show it remains a dangerous strategy for prop firm accounts. The core idea behind this “profit-funded” pyramiding is that since your additional position size is constrained by your unrealized gains, the tail risk should be lower than a standard Turtle-style scaling approach. In other words, you are betting with the market’s money rather than your own capital. With the addition of flat-guard features, which weren’t available in my previous research, I decided to re-verify if this method could finally pass muster.
The comparison
I tested several variations within the PyramidBreakout family to isolate the effects of this scaling logic. Each variant used the same trend-following core (FX4 with multi-timeframe analysis) and a risk setting of 0.003 per trade.
| Variant | Monthly Return (OOS) | Max Drawdown (OOS) | Risk-Adjusted Ratio |
|---|---|---|---|
| No Pyramiding (Control) | +0.423% | -6.85% | 4.7 |
| Standard Turtle (max 4) | +0.933% | -20.7% | 4.1 |
| Profit-Funded (β 0.5) | +0.686% | -14.2% | 4.0 |
| In the out-of-sample (OOS) data, while the profit-funded variants did show higher monthly returns than the control, the drawdown expanded significantly. When you look at the risk-adjusted ratio, calculated as total return divided by drawdown, the control group actually performs best. In other words, the extra returns were merely a byproduct of amplifying the beta of the recent yen-depreciation regime, rather than a sign of a superior edge. |
The M1 intraday stress test
The real deal-breaker appeared when I rebuilt the account equity using 1-minute bars to see how these strategies handle intraday volatility. The control group stayed within reasonable bounds, with a worst intraday loss of -3.58% and zero days exceeding a -4% loss. However, the profit-funded variants struggled. The β 0.5 version hit a worst intraday loss of -7.88% with five days exceeding the -4% threshold, and the β 1.0 version hit -9.41% with seven such days. Even though the profit-funded approach is smoother than the standard Turtle strategy, which showed a -26% drawdown in-sample, the intraday tail risk is 2.2 to 2.6 times higher than the control. Because prop firm rules are strict, a single day of -5% is often an automatic disqualification. Over an 11-year period, the flat-guard mechanism triggered on seven separate occasions due to these intraday losses, effectively blowing up the maximum drawdown path.
The verdict
I am not adopting this system. While the “profit-funded” approach dilutes the poison of aggressive pyramiding, it does not remove it. First, the in-sample data showed a profit factor of 0.99, meaning the pyramiding itself failed to create a new edge; it simply acted as a beta amplifier for existing trends. Second, even with protective guards in place, the increased intraday tail risk consumes too much of your drawdown budget. My previous conclusion that this style is unsuitable for prop firms remains unchanged, even with modern risk-management tools. I will keep the profit-funding parameter as a tool for future experiments, but it will not be part of my core trading strategy.
How this connects
This verification builds on earlier ones (what failed before and what I tried this time, comparisons between approaches).